Has TARP Worked Exactly as Planned?

Bank of America has found it surprisingly easy to begin to raise the $34 billion dollars required by the stress tests, and public confidence in the banking system post-tests is up for the first time all year. The downside of bending over backward for the banks is all too evident: it's been ungodly expensive and the banks could be more difficult to re-regulate after this mess is over. But we've avoided a Lehman-esque castastrophe without electro-shocking public opinion with premature nationalization rumors, while keeping investors eager to capitalize the most troubled institutions. Not ideal, no. But not bad for a game of messy incrementalism.

If you understand the administration's financial efforts as partly driven by a desire to keep downside risk manageable rather than cataclysmic -- and I think that's how you should understand them -- then I think Derek is basically right. Things are working out pretty well. Not perfectly. But a failed bank nationalization is rather scarier, and quite a bit less survivable for the related politicians, than an imperfect, somewhat-too-costly, TARP program. And so far, the administration has managed to avoid nationalizing a major bank, and so has managed to avoid the risk of failing at nationalizing a major bank.

Bear in mind that we have a peculiar banking structure compared to most companies, where we restrict what banks can do, and banks get around that by having "bank holding companies" own what are legally subsidiary banks (normally in different states), with the bank holding company doing many of the things a bank can't do.

Which means we would not have to nationalize many banks at all. Simply break strip the banks out of the "bad bank holding companies", swap around the balance sheets to make sure that the banks themselves are solvent, release them to operate "in the wild", and let the bank holding company that is now not holding any banks head off to the bankruptcy court like Chrysler and all manner of other mismanaged companies.